A bad credit loan can be a convenient and simple way to cover a large expense or unexpected bill. However, lenders charge significantly more when your credit score is lower. Before you apply, determine how much it will cost you - and look into alternatives that might be more affordable.
AAPL
STZ
TSLA
AMZN
Bad credit loans offer convenience to borrowers who may not be able to qualify for other loan options. However, there are a number of risks when you borrow a bad credit loan. They will be more expensive because lenders will charge higher interest rates or - depending on the type of loan - more fees. You may also be limited in how much you can borrow and how long you have to repay your loan.
So while a bad credit loan has some benefits, it is worth looking into alternatives or waiting until your credit improves before you apply.
Because borrowers with bad credit are viewed as more risky, they face higher interest rates. For many people, this looks like rates above 30 percent. Combined with a higher origination fee - the cost to process a loan - and you will wind up with a much more expensive loan. This means higher monthly payments and more interest paid overall.
You may also be limited to how much you can borrow. While the amount you are eligible for is typically based on your income and other debts, a lender may not be willing to give you as much if you have bad credit. If you need a larger amount, it may be difficult to qualify for.
Similarly, your loan term is also based on your credit. You may not be eligible for longer terms of five years because it increases the risk of default. Unfortunately, that means you may see a higher monthly payment when you borrow a bad credit loan.
The primary difference between personal loan costs is the interest rate you are charged. Borrowers with good credit have access to lower rates, which makes their loans less expensive.
This is why you should try to improve your credit before you borrow if you can. It may end up saving you hundreds of dollars - and give you access to lower monthly payments.
For example, a loan of $5,000 with a three year term will cost over $1,500 more if you have bad credit. This is because the average personal loan rate for a borrower with bad credit is 28.50 percent to 32 percent. For a borrower with good credit, rates are a significantly lower 13.50 percent to 15.50 percent.
To find a bad credit loan, you will need to know your financial situation and spend time comparing at least three lenders - preferably more. Bad credit loans are primarily available from online lenders, although there are some credit unions that offer an alternative option with a low interest rate cap.
Bad credit loans are far from your only option. There are several alternatives if you have bad credit. You may face higher rates if you opt for a credit card or home equity loan, and they do have different risks you will need to consider. And while help from friends and family may not come with high rates, it has its own drawbacks you should be aware of.
In addition to these, consider credit counseling. It can help you manage your finances, negotiate with lenders and improve your situation for future loans.